Smithfield Foods bid reflects China’s quality issues

John Wolfe, right, chief executive officer of the Port of Tacoma, addresses the annual Agriculture Transportation Coalition meeting as Jim Newsome, president and chief executive officer at South Carolina State Ports Authority, left, looks on June 14 in San Francisco.

SAN FRANCISCO — A Chinese pork producer’s bid for Smithfield Foods Inc. is an attempt to anticipate where broader demand for agricultural goods will head as incomes rise in China, economist Paul Bingham told Agriculture Transportation Coalition conference attendees.

Bingham, economics practice leader at Cambridge, Mass.-based CDM Smith, was the keynote speaker at the coalition’s 25th annual meeting June 13-14 in San Francisco.

Shuanghui International bid $4.7 billion in May to acquire Smithfield, Va.-based Smithfield Foods. The deal, which requires approval, is really worth $7 billion because Shuanghui would take on assumed debt, he said.

“It’s not about what’s going on in the U.S. relationship with China, it’s about what’s going on in China,” Bingham said. “This is ultimately a strategic move by this firm to show a commitment to improving their food quality and to move where the market is going for agricultural products in China.”

“It potentially demonstrates that they’re using Western processes applicable to agriculture that can benefit certain producers in China versus those who don’t have access,” he said. “They can stand up and say, ‘We’ve got a reputation for food quality and we’re a success in the marketplace.’”

The background for the deal includes food safety scandals and other problems with plants in China. With personal wealth on the rise in that country, some Chinese producers anticipate diminishing tolerance for unpredictable quality.

For that eventual payoff at home, a Chinese business is willing to take the risk of losing U.S. consumer support for Smithfield Foods if the company ends up in foreign ownership, Bingham said. Shuanghui has said it would retain current Smithfield management.

China has not had more than 5% of its U.S. investments in agriculture, seafood and related sectors in its peak years of activity here, Bingham said.

“Historically agriculture has not been on their radar as a key focus,” he said. “But going forward it might be. If the Smithfield deal goes through, there could be a lot of game makers on Wall Street who will say, ‘Let’s try to match up some more of that Chinese money with other companies that may be valued more by a Chinese buyer than what we’re getting on the U.S. market.’”